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MOSL: VEDANTA (Upgrade to Neutral)-Aluminum and Zinc International drive slight miss

Vedanta: Aluminum and Zinc International drive slight miss

(VEDL IN, Mkt Cap USD8.8b, CMP INR164, TP INR150, 9% Downside, Upgrade to Neutral)

 

• EBITDA at INR52b (-15% QoQ) was below our est. of INR54.9b on lower-than-expected volumes in Aluminum and realization in Zinc International. Other income declined 77% QoQ to INR3.8b (est. INR6b) on mark-to-market losses on its structured investment. Adj. PAT decreased 64% QoQ/39% YoY to INR9.3b (our est. INR10.9b).
• Aluminum EBITDA/t declined USD66 QoQ to USD55 on lower LME (USD66) partly offset by lower costs (USD12). Zinc International's EBITDA declined 67% QoQ (to INR1.3b) on lower realization and higher costs. Copper continues to drag as operations remain shut. Power and Oil & Gas were on expected lines.
• Unwinding of structured investment: VEDL has reversed its structured investment with Volcan (a related party) for an underlying exposure in Anglo-American shares at a gain of ~USD100m. This comes on the back of Volcan itself unwinding its position in Anglo. We see the early unwinding as positive given the high counter party risk involved - a major value of Volcan is derived from VEDL.

Raise multiples for O&G and Zinc International; Upgrade to Neutral

• We reduce FY20E EBITDA by 5% on lower performance of Zinc International. However, we raise our multiples for O&G (2.5x v/s earlier: 1.25x) and Zinc International (5x v/s earlier: 3.25x) on unwinding of related party exposure.
• VEDL's management has dismissed any further investments in such related-party transactions; instead, its focus is on the company's core businesses. While this is a positive step, we note that the high debt at VEDL's parent entity continues to raise concerns. Until there is confirmation that VEDL can walk the talk, some overhang on the stock may persist. Upgrade to Neutral with a SOTP-based TP of INR150/share.